The Essential - Milton Friedman

The Essential MILTON
FRIEDMAN
The Essential MILTON
FRIEDMAN
Milton Friedman was one of the most influential economists
The Essential MILTON FRIEDMAN

of all time. He revolutionized the way economists think about
consumption, about money, about stabilization policy, and about
unemployment. He demonstrated the power of committing oneself
to a few simple assumptions about human behaviour and then
relentlessly pursuing their logical implications. He developed and
taught new ways of interpreting data, testing his theories by their
ability to explain multiple disparate phenomena. His successes were
spectacular and his techniques were widely emulated.
But Friedman’s influence extended beyond economists. To the public

at large, he was the world’s foremost advocate for economic and
personal freedom. In the United States, he helped to end the
military draft, to broaden educational choice, and to change
the regulatory climate. Worldwide, almost all central banks
now follow policies that are grounded in Friedman’s
insights and recommendations.
This book briefly summarizes Friedman’s

extraordinary contributions to economic theory,
Steven Landsburg
economic practice, economic policy, and

economic literacy.
978-0-88975-542-0
by Steven Landsburg
The Essential
Milton Friedman
by Steven E. Landsburg
Fraser Institute
www.fraserinstitute.org
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Copyright ©  by the Fraser Institute. All rights reserved. No part of this book
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The author of this publication has worked independently and opinions expressed by
him are, therefore, his own, and do not necessarily reflect the opinions of the Fraser
Institute or its supporters, directors, or staff. This publication in no way implies that
the Fraser Institute, its directors, or staff are in favour of, or oppose the passage of,
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Printed and bound in Canada
Cover design and artwork

Bill C. Ray
ISBN ----
Contents
Introduction / 1
1. The Permanent Income Hypothesis / 3
2. Money, Prices, and Inflation / 9
3. Monetary Policy / 13
4. Monetary History / 17
5. Unemployment / 23
6. Chicago Price Theory / 29
7. Capitalism and Freedom / 36
8. Policy Analysis / 41
9. Activism / 45
10. Civil Discourse / 53
Notes on the chapters including further readings / 59
Publishing information / 65
About the author / 66
Publisher’s acknowledgments / 66
Supporting the Fraser Institute / 67
Purpose, funding, and independence / 67
About the Fraser Institute / 68
Editorial Advisory Board / 69
Introduction
When economists are called “influential,” it usually means they’ve changed the
way other economists think. By that standard, Milton Friedman was one of the
most influential economists of all time. He revolutionized the way economists
think about consumption, about money, about stabilization policy, and about
unemployment. He demonstrated the power of committing oneself to a few
simple assumptions about human behaviour and then relentlessly pursuing
their logical implications. He developed and taught new ways of interpreting
data, testing his theories by their ability to explain multiple disparate phenom-
ena. His successes were spectacular and his techniques were widely emulated.
In several cases, Friedman’s methods inspired the creation of entire new
subfields including the economic analysis of law, the quantitative approach to
economic history, the economics of crime and punishment, the economics of
family relationships, and the economic approach to finance—leading to mul-
tiple Nobel prizes for Friedman’s acolytes.
But Friedman’s influence extended beyond economists. To the public at
large, he was the world’s foremost advocate for economic and personal freedom.
Through his writings and his media appearances, he educated millions about
how markets work and how governments often fail. He restored the respect-
ability of classical liberal notions that had fallen into disfavour, and he did so
not by artful propaganda but by conveying a deep and lasting understanding
of the ideas themselves.
And he influenced policymakers. In the United States, he helped to end
the military draft, to broaden educational choice, and to change the regula-
tory climate. Worldwide, almost all central banks now follow policies that are
grounded in Friedman’s insights and recommendations (updated, of course, for
the changed world we now live in), and have thereby made the world a richer
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 The Essential Milton Friedman
and more stable place, largely delivered from the sort of disastrous policy errors
that were once routine. When the Soviet Union collapsed, Friedman’s writings
inspired the design of new institutions in several former Communist countries,
and those that adopted this course were rewarded with prosperity and freedom.
After an early flirtation with statistics (where he developed the “Friedman
Test” to interpret disagreements among judges in, say, a skating competition),
Friedman moved on to study economics, writing a  doctoral dissertation
on, among other things, the effects of occupational licensing, a subject to which
he frequently returned. The next year, he accepted a job at the University of
Chicago, where he did most of his groundbreaking academic work on con-
sumption behaviour, monetary theory, and monetary history, and served as
the undisputed intellectual leader of the economics department for  years.
In , he was awarded the Nobel Prize.
The public became acquainted with Friedman through his  best-
seller Capitalism and Freedom and his subsequent series of approximately 
columns in Newsweek Magazine, along with his increasing presence as an
advisor to policymakers. After his retirement in , Friedman moved to
the Hoover Institution at Stanford University and, in collaboration with his
wife Rose and the television producer Robert Chitester, created the television
series Free to Choose and an accompanying book by the same title. Both the TV
series and the book drew huge audiences and cemented Friedman’s worldwide
celebrity. Several Eastern European leaders specifically cited Free to Choose as
a major inspiration for their new economic policies after the fall of the Soviet
Union.
It would take several large volumes to do justice to Friedman’s extraor-
dinary contributions to economic theory, economic practice, economic policy,
and economic literacy. The few brief chapters that follow will give an overview
of what those volumes might contain.
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Chapter 1
The Permanent Income

Hypothesis
Suppose you believe your economy is in the doldrums because people are some-
how not spending enough. How do you get them to open up their pocketbooks?
Start by perusing some data. You’ll quickly discover that spending is
highly correlated with income. It’s well documented that if, in any given year,
Alice out-earns Bob by a dollar, then on average she’ll outspend him by at least
 cents.
Aha! Problem solved! If you want people to spend more, you should start
by raising their incomes. Encourage your government to hire Alice and raise
her salary by a dollar. She’ll spend an extra  cents or so—and that’s only the
beginning. If she spends that  cents at the butcher shop or the hair salon or
the craft brewery, then the butcher or the beautician or the brewer earns an
extra  cents and probably spends about  percent of that, which raises yet
someone else’s income, and off we go. When all is said and done, one dollar of
additional government spending can raise total spending (and total income)
by $ or more.
That’s the story of the so-called “Keynesian multiplier.” Once upon a
time, pretty much all economists considered it a cornerstone of policymaking.
Here’s the problem:
Income is indeed highly correlated with spending. But correlation is not
causation. When Alice out-earns Bob by a dollar, she typically outspends him
 I’m using  cents as an illustration here and throughout the chapter. There is room for some
quibbling about whether the correct number is a little lower or a little higher, but that doesn’t
matter here.
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 The Essential Milton Friedman
by  cents. But her current earning is not the cause of that spending. Instead,
she outspends him (in most cases) because she expects to continue to out-earn
him for many years to come.
As a general rule, people calibrate their spending not to their current
incomes but to their permanent incomes—that is, to something like their
expected lifetime earnings.
Now if Alice gets a $ yearly raise from her private employer, she’s likely
to believe—correctly!—that the raise is probably permanent. That’s why she
spends more, and that’s why the data show that higher incomes usually go
hand-in-hand with higher spending. But if, instead, Alice gets a $ yearly raise
from a government that has decided to temporarily ramp up spending, she’ll
probably want to squirrel most of that dollar away against the day when her
salary returns to normal. The cycle of spending we called the Keynesian mul-
tiplier never gets off the ground.
Okay, then. Maybe the cure is for the government to hire Alice and per-
manently raise her salary by $ a year. That sounds good until you start thinking
about where the government is going to get that dollar every year:
• The government could raise Bob’s taxes by a dollar a year. But then
just as Alice’s spending goes up, Bob’s goes down. If you want to
increase total spending, this gets you nowhere.
• The government could borrow a dollar from Bob every year. But even-
tually Bob is going to want to be paid back, at which point the govern-
ment is going to have to raise Charlie’s taxes to get the money. At that
point, Charlie starts spending less. Worse yet, if Charlie follows the
news, he’s likely to realize today that the government is running up
debt, that future taxes are likely to rise, and that his own permanent
income has therefore a taken a hit, which means he’ll reduce his
spending immediately.
There, then, is the rub. If you want Alice to spend more, you have to
increase her permanent income, not just her current income. But the gov-
ernment can’t increase Alice’s permanent income without decreasing Bob’s
 I like to tell my college students that this is why economics majors often own cars while philosophy
majors don’t, even though their current incomes are pretty much identical. The economics majors
expect to be employed someday.

The Essential Milton Friedman 
or Charlie’s permanent income by the same amount, which dooms the entire
project to failure.
That’s one consequence of Milton Friedman’s permanent income hypoth-
esis. More precisely, Friedman hypothesized that:
• When your permanent income rises by, say, $ a year, you’ll typi-
cally increase your annual spending by something very close to $.
• When your non-permanent income rises or falls by $ in a given
year (because of an unexpected bonus at work, a lost wallet, a win-
ning scratch-off ticket, or an illness) then you’ll typically make only a
small adjustment in your current spending.
If Alice out-earns Bob by $ a year, then (for an average Alice and an
average Bob) it’s usually because her permanent income exceeds his by about
$ and her non-permanent income exceeds his by $. Therefore, since only
her permanent income affects her spending, she outspends him by about $.
Therefore it’s very easy for an economist to notice that when Alice out-
earns Bob by $, she outspends him by $—while remaining entirely oblivi-
ous to what lies behind the numbers. In particular, that economist can easily
make the mistake of believing that a $ increase in non-permanent income
can lead to a $ increase in spending. But that inference, which underlies the
entire theory of the Keynesian multiplier, is wrong.
This makes a great deal of sense when you think about it. If Alice and
Bob each earn $, a week, their permanent incomes are identical. But if she
gets paid on Fridays and he gets paid on Wednesdays, then her Friday income
is $, and his Friday income is $. If spending really depended on (daily)
income, we’d expect every Friday to see Alice eating steak and Bob eating
crumbs (and the reverse on Wednesday). It’s only because spending actually
depends on permanent income that they in fact both live about equally well
each day.
 There are occasional exceptions. Conceivably the government could build a highway that reduces
transportation costs by so much that everyone’s permanent income—even after factoring in the
taxes they pay to build the highway—goes up. Unfortunately, most government projects are not
that productive.
 Exactly how close depends on a variety of factors including the interest rate and how much
you’ve already got in the bank. But for illustration, I’ll suppose going forward that you increase
your spending by the full $.
 The $ figure is for illustration, though the real-world number is probably not too far from this.
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 The Essential Milton Friedman
The permanent income hypothesis also settles a nagging riddle that

had been troubling economists for a long time. If Alice earns $, more
than her neighbour Bob, she typically outspends him by about $,. But
if Alice earns $, more than her grandfather did at her age, she typically
outspends him by almost the full $,. (We see this in real-world data.)
Whence the discrepancy?
Answer: When Alice out-earns Bob, it’s often partly because she’s hav-
ing an unusually good year. Unusually good years don’t generally repeat them-
selves. So if she out-earns Bob by $,, she might expect to out-earn him
by only about $, going forward, and increases her spending by almost
that amount.
But when Alice out-earns her grandfather, it’s likely to be because times
have changed. That’s a permanent condition. She expects to continue out-earn-
ing him by about the same amount forever, and spends accordingly.
So the permanent income hypothesis explains a lot. There remains the
question of whether it’s true. Friedman proposed several tests. For example:
farmers’ income is heavily dependent on market and weather conditions (this
was especially true in Friedman’s time, when farmers didn’t routinely hedge
their bets through futures markets). Factory workers’ income is far more pre-
dictable. So an upward spike in Frank the farmer’s income is likely to be mostly
temporary, whereas an upward spike in Mary the machinist’s income is likely to
be mostly permanent (maybe she got promoted!). Therefore we should (on aver-
age of course) see machinists with income spikes increasing their spending by
more than farmers with income spikes. Real world data confirm this prediction.
Friedman carried out a great many such tests, comparing not just farm-
ers versus machinists, but Swedes versus Englishmen, black Americans versus
white Americans, young people versus old people, and more. The results in each
case are consistent with the permanent income hypothesis. So while Friedman
acknowledged that no single test can constitute a slam-dunk proof, he argued
that the weight of all these tests taken together comes pretty close to being
definitive. Essentially all economists now agree.
 This sort of empirical strategy was a Friedman trademark. Instead of relying on traditional tests
of statistical significance, Friedman generally preferred to judge his hypotheses by their ability to

The Essential Milton Friedman 
In fact, essentially all economists now view the permanent income

hypothesis or some close variant as so nearly self-evident that it’s hard to imag-
ine a time when it needed to be discovered. But there was such a time. Prior to
Friedman, a series of excellent economists, including Rose Director (later Rose
Director Friedman), Dorothy Brady, and the remarkable Margaret Reid, devel-
oped indispensable techniques for the analysis and interpretation of household
expenditure data, and Friedman always graciously acknowledged his debt to
those pioneers. But he was the first to envision the permanent income eco-
nomic theories, the first to confront the hypothesis with a meticulous analysis
of the data, the first to tease out its policy implications, and the first to place
it in a proper historical context by explaining how it complements, expands,
and sometimes supplants the work of his predecessors. When the Nobel Prize
committee listed the achievements for which Friedman was selected, the per-
manent income hypothesis was first on the list.
explain a great many diverse observations. Friedman, who made his mark as a theoretical statisti-
cian before he switched to economics, was acutely aware of the shortcomings of the traditional tests.
 As is always the case with good science, subsequent researchers have proposed and made good
arguments for variations on Friedman’s theme, but essentially all modern research on consumption
behaviour has its roots in his approach.

 The Essential Milton Friedman

Chapter 2
Money, Prices, and Inflation
The Nobel Prize-winning economist Robert Solow once observed that

“Everything reminds Milton of the money supply.” It’s certainly true that Milton
Friedman had a lifelong fascination with the money supply, leading to insights
that profoundly changed both academic thought and practical policymaking.
Actually, Friedman’s analysis begins on the other side of the market—the
demand for money—as opposed to the supply. To the casual reader, the idea
of studying the “demand for money” might sound absurd. Don’t we all want as
much money as we can possibly get? Isn’t that all there is to say on the matter?
The answer is: Of course not. We’d all like as much wealth as we can pos-
sibly get, but wealth is not the same thing as money. Bill Gates is surely wealthier
than I am, and I’m sure he’s got a bigger house and bigger stock portfolio, but
I’m not sure which of us has more money, by which I mean the coloured pieces
of paper in our wallets plus our bank balances.
Like the average North American, I hold, very roughly, about  weeks’
income in the form of money. (Most of this is in the form of bank balances
which I can access by writing checks or using my debit card.) With a little
juggling—selling off some other assets, making withdrawals from long term
savings accounts, taking out bank loans, or hoarding more cash—I could have
quite a bit more. But I’m content with the money I’ve got.
Why  weeks’ income, and not  or ? Because I like to be prepared so
I can make unanticipated purchases, from a hamburger on the way home from
 Solow went on to observe that “Everything reminds me of sex, but I try to keep it out of my papers.”
 There is room to quibble about exactly where to draw the line between bank balances that do and
do not count as money. Checking account balances should surely count; balances in certificates of
deposit that can’t be withdrawn on short notice without a penalty probably shouldn’t. The basic
idea is that money is an asset that you can use quite easily to make purchases on a moment’s notice.
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 The Essential Milton Friedman
work to an emergency plumbing repair. If my gutter guy starts taking credit

cards, I might decide to hold less money. If I hear that street crime is on the
rise, I might decide to hold less cash, and hence less money in total. If my bank
starts offering a higher interest rate on certificates of deposit, I might want to
take advantage of that by giving up some of my money. But unless something
changes, I’m likely to go on wanting to hold about  weeks’ income in the
form of money.
With that out of the way, we can turn our attention to the supply of
money. Money is supplied by the banking system and the monetary authorities
(e.g., the Federal Reserve System in the United States, the Bank of Canada in
Canada, and the Bank of England in the UK) in complicated ways, the details
of which don’t much matter here. So let’s imagine a simple world where, as
of a particular Monday morning, the populace collectively holds a total of $
million. The government, which has been planning all along to buy $ million
worth of paper clips on Monday afternoon, makes the decision to pay for those
paper clips with newly printed money (as opposed to using, say, tax revenue
or borrowed funds).
What should we expect to happen? As of Monday afternoon, the people
who sell paper clips are holding more money than they held this morning. In
fact, the total money supply has doubled, so if we average this over the entire
population, the average person (call her Alice) is now holding twice as much
as she held this morning. But that’s more than she wants. If she wanted this
much money, she would have arranged for it in the first place (perhaps by
depositing a bit more of her paycheque into her chequing account instead of
her retirement account).
So Alice has a problem: How is she going to get rid of this excess money?
Discarding it seems like an exceptionally bad idea. Maybe she turns to her
neighbour Bob and talks him into borrowing one of her dollars. But then Bob
has an extra dollar to get rid of. Maybe she goes to the bank and buys a certifi-
cate of deposit. But then her banker, Carol, has more money than she wants in
her vault. No matter where the money goes, the average person still has twice
as much money as he or she did this morning and is still trying to get rid of it.
 “Holding more money” can mean having more cash in your pocket, or it can mean having a
larger chequing account balance.

The Essential Milton Friedman 
The other way to get rid of money is to spend it. So sooner or later, Alice
(or someone) decides to buy an extra hamburger or an extra haircut or a more
expensive sweater—or maybe she schedules a gutter repair she’d been planning
to put off till next year. This bids up the prices of hamburgers, haircuts, sweaters,
and home maintenance by, say,  percent. Because prices are higher, people
are now willing to hold  percent more money than they held this morning.
Unfortunately, the amount of money floating around has gone up not by 
percent but by  percent. So the process continues until prices are bid up
by fully  percent. Now people want to hold all the excess money and the

process comes to a halt. The bottom line:
If you double (or triple or quadruple) the money supply, prices will
double (or triple or quadruple).
The process might take a while, and some interesting stuff can happen
along the way. (We’ll have much more to say about this in the next few chapters.)
A little reflection reveals a somewhat deeper moral:
A jump in the general level of prices (as opposed to an increase in the
price of one specific good or another) is always caused by people trying to get
rid of money.
Why might people want to get rid of money? We’ve listed some reasons
already—a wider acceptance of credit cards, an increase in street crime, a rise
in the interest rate, or an increase in the supply of money, leaving people with
more than they want to hold.
     
That’s a good analysis of a rare phenomenon: A one-time jump in the price level.
A far more common phenomenon is inflation, a steady and sustained rise in
the price level over a substantial period of time.
 In brief: People try to get rid of money by buying things, which drives up prices until people
are willing to hold the extra money after all. You might wonder why we can’t tell a different story:
Maybe people try to get rid of money by lending it, which drives down interest rates until people
are willing to hold the extra money after all. (Remember that when the interest rate is low, alter-
natives to money—like certificates of deposit—are less attractive.) The problem with that story is
that it runs afoul of economic theory, which tells us that the interest rate must be fully determined
by the supply and demand for current and future goods and services, leaving no room for it to be
affected by changes in the supply and demand for money.

 The Essential Milton Friedman
What causes inflation? Our moral generalizes: Inflation is always caused

by people trying to get rid of money, not all at once, but steadily over a sub-
stantial period of time.
And why might that happen? In principle, it could happen if there is
a steady increase in the acceptance of credit cards, a steady increase in street
crime, or a steady rise in the interest rate. But each of these factors seems quite
inadequate to explain the rates of inflation, and the long periods of inflation,
that we see in the real world. That leaves just one culprit: A steady increase in
the supply of money.
This is the analysis that led to Milton Friedman’s famous declaration that
“inflation is always and everywhere a monetary phenomenon.”
Prior to Friedman, this was controversial. In those dark days, one
frequently heard talk of “cost-push inflation,” in which, say, increasing wage
demands from workers lead to rising prices for consumer goods, leading to
increasing wage demands from workers, and so on around the vicious circle.
Friedman insisted—and successfully convinced most economists—that this
superficially plausible story makes no sense. One way or another, the quantity
of money demanded has to equal the quantity of money supplied. Prices must
adjust until that equilibrium is reached. This leaves no room for anything else
to affect the price level.
     
The next obvious question is: Why should we care about the price level and
inflation in the first place, and what outcomes should the monetary authorities
be aiming for? That’s where Friedman turned his attention next, and so shall we.

Chapter 3
Monetary Policy
Now that we’ve talked about how the price level is determined, let’s double
back and ask why we should care about the price level in the first place. If the
money supply doubles, and all prices (including wages) double in response, has
anything important really changed?
Probably not. Instead of costing $, a hamburger now costs $. Alice
has to work just as many hours to earn that $ hamburger today as she worked
to earn a $ hamburger yesterday. Instead of carrying $ in her pocket (enough
to buy five hamburgers), she’ll carry $—still enough to buy five hamburgers.
Instead of keeping $, in her chequing account, she’ll keep $,—the
same fraction of her income that she’s always kept.
You might worry about the effect on borrowers and lenders: If Alice
initially owes Bob $ (the price of two hamburgers), then after the price level
doubles, she gets to pay him back with a debased $ that buys only one ham-
burger. That makes her richer and him poorer. But that’s an issue only if Alice
and Bob fail to anticipate the price change. If Bob knows he lives in a world
where prices sometimes jump, he can always insist on loan contracts with
automatic adjustment clauses, so that Alice is always required to repay enough
dollars to buy two hamburgers, whatever that number of dollars might be.
And even if Bob’s foresight fails him, so that he fails to include that
clause and takes a big loss when the price level doubles, it’s not the kind of loss
economists usually worry too much about. That’s because Bob’s loss is Alice’s
gain, so that overall the populace (which includes both Alice and Bob) is no
better or worse off than before.
So a one-time jump in the price level is, at least to a very good approxi-
mation, nothing to worry about. You might be tempted to conclude that
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 The Essential Milton Friedman
inflation is nothing to worry about either. After all, inflation is just an ongoing
series of jumps in the price level, right?
Not so! Let’s think this through from the beginning again.
On Monday morning, Alice the average citizen is holding  weeks’
income in her purse and her checking account.
On Monday at noon, the money supply doubles, and now Alice holds 
weeks’ income. But she only wants to hold  weeks’ income, and therefore
tries to get rid of money by buying things. Eventually prices are bid up to twice
this morning’s level, and Alice now happily holds her share of the new money,
which is equal to  weeks’ income—her goal all along.
Now tweak the story: On Monday at noon, the government doubles
the money supply and announces plans to double it again every day at noon.
As a result, Alice decides that, going forward, she wants to hold only  weeks’
income, not . Why? Because she now expects an ongoing inflation—which
means she expects the money in her pocket and her checking account to lose
value overnight. That prospect makes holding money less attractive.
So on Monday afternoon, Alice (along with many others) tries to get rid
of money by buying things. Eventually, prices get bid up to twice this morning’s
level, leaving Alice holding  weeks’ income, which is still more than she wants.
Therefore she continues trying to buy things, driving prices up still further. If
the money supply doubles on Monday, with further increases expected to fol-
low on Tuesday, Wednesday, Thursday and Friday, then the price level must
more than double on Monday.
More succinctly: At some point during the onset of an inflation, the price
level must rise faster than the money supply. Friedman called this phenom-
enon overshooting, which might have been an unfortunate vocabulary choice
because it seems to suggest that someone has made a mistake or missed a
target. Nothing of the sort is true; Alice wants to reduce the real value of her
money holdings—the number of hamburgers her pocket change can buy and
the number of home repairs her checking account balance can cover—and by
the end of the day she’s done exactly that.
 Where did the extra money come from? Maybe she sold a whole lot of paper clips to the gov-
ernment. Or maybe she sold her used couch to Bob, who was looking to get rid of money after he
sold a bunch of paper clips.

The Essential Milton Friedman 
Unfortunately, Alice’s life just got a little worse. Instead of having enough
cash in her pocket to buy five hamburgers, she’s got enough to buy four, which
will be an annoyance on the occasional day when she has a gargantuan appetite.
Instead of having  weeks’ income in her checking account, she has —which
means she’ll occasionally have to delay a purchase to avoid an overdraft. That
loss to Alice is not offset by any gain to anyone else—and that’s the kind of loss
economists care about.
It might be a pretty small loss, but a great many others are of course suf-
fering in a similar way, and some more than others. Bob, who runs a small shop,
notices that in these new inflationary times, the cash in his register is losing
value as it sits idle, so instead of keeping  hamburgers’ worth of cash in the
register as he’s always done, he now keeps only (say)  hamburgers’ worth. Now
he runs low on change a little more often, aggravating a few extra customers.
If that still sounds small, it’s because it is small, at least when the rate
of inflation is low. At higher rates of inflation, people hold so little money that
their lives are substantially disrupted. The economist John Maynard Keynes
was in Germany during the inflation of the s, when prices were rising so
rapidly that a beer purchased at midnight was substantially more expensive
than a beer purchased at  p.m. When he thought he would want three beers
over the course of the evening, he bought them all as early as possible and
drank them slowly (note that Keynes, like Alice, was trying to get rid of money
by buying things). All his life, Keynes remembered Germany as a place where
he’d drunk a lot of warm beer.
For a more extreme example, consider the Hungarian inflation following
World War II, when prices, on average, were multiplying by a factor of about
 every month. Imagine a cup of coffee that costs  cents on January , $
on February , $, on March , $, on April , $ million on May ,
$ billion on June , $ billion on July , and $ trillion on August . Wages
were adjusted, and workers were paid, three times a day. Of course it was
imperative to spend your paycheck immediately before it lost almost its entire
value, which means that in a typical family you had one spouse working and
the other running back and forth from the workplace to the shops, collecting
the checks, spending the money, and rushing back to the workplace in time
for the next check.

 The Essential Milton Friedman
So, like many things, inflation in small doses is a little bit bad and infla-
tion in higher doses is extremely bad. But why put up with any badness you don’t
have to put up with? It seems like the best scenario is no inflation at all—and
the recipe to accomplish that scenario is zero growth in the money supply.
In fact, why not go even further? If Alice enjoys holding  weeks’ income
in the form of money, perhaps she’d be even happier holding  weeks’ income.
Maybe she could use a little nudge in that direction! We could provide that nudge
with a negative inflation rate (also called deflation), which causes the money in
Alice’s pocket to grow over time in value, thus encouraging her to hold more of it.
Hold on a minute! If holding a little extra money makes Alice a little
happier, why does she need a nudge? The answer is that when Alice chooses
to hold more money—and hence to spend less money—she’s helping to keep
the price level down, which benefits not just her but Bob, Carol, David, Evelyn,
and countless others. And if they in turn hold more money, then Alice shares
in the benefits. As a result, everyone can be better off if everyone gets a little
nudge. So Friedman was led to contemplate a negative inflation rate, driven by
a steady reduction in the money supply. (The government could, for example,
collect some taxes in cash and burn  percent of the proceeds.)
On the other hand, money supply growth has some advantages. If the
government pays for paper clips with newly minted money, then it doesn’t have
to pay for paper clips by taxing (say) coffee, and that’s good for everyone who
buys or sells coffee. After weighing this and other factors, Friedman in the end
endorsed a small but positive inflation rate on the order of about  percent a
year, but, believing that  percent a year was likely to be politically infeasible,
declared himself perfectly willing to settle for as much as  percent.
But we’ve been ignoring yet another set of issues. In our story, the money
supply increases, then Alice and Bob try to spend the extra money, then prices
go up. In the long run, that really is all that matters. But in the short run, the
price adjustments take place in fits and starts, which can have important con-
sequences. We’ll turn to those next.
 The US inflation rate peaked at almost  percent in  and at nearly  percent in Canada
in . Friedman might have been both surprised and pleased to learn that over the past decade,
the inflation rate has rarely risen above  percent—largely because the authorities have taken
Friedman’s prescriptions to heart.

Chapter 4
Monetary History
The quantity theory of money—that is, the circle of ideas surrounding the notion
that prices tend to move in tandem with the money supply—has a long history
going back to the astronomer Nicolaus Copernicus in the fifteenth century.
After the onset of the Great Depression in the early s, the new generation
of “Keynesian” economists largely rejected the quantity theory, arguing that
often, people don’t have strong stable preferences about how much money
they hold. Therefore, said the Keynesians, when the authorities inject new
money into the system, people might simply hold it, without bidding up prices.
Throughout the s and s, a smattering of economists, notably
Henry Simons and Lloyd Mints at the University of Chicago, tended the fires
of the quantity theory. When Milton Friedman joined the fray in the s, he
sometimes painted himself as simply the recipient of the torch passed by his
illustrious predecessors. But it’s widely acknowledged that Friedman’s version
of the quantity theory was in fact highly original, far subtler, more insightful,
and better designed for empirical testing.
The evidence for the quantity theory is largely to be found in the meticu-
lous -page Monetary History of the United States, –, written by
Friedman and his co-author Anna Schwartz. The product of  years’ work by
the two authors and their countless research assistants, the Monetary History
was instantly recognized as a modern classic and a work of monumental
importance. In fact, the adjective “monumental” occurs repeatedly in dozens
 I’ve put the word Keynesian in quotes, using it to describe the views of those economists who
called themselves Keynesians, without venturing into the delicate territory of how closely their
views did or did not conform to those of John Maynard Keynes himself.
www.fraserinstitute.org Fraser Institute 

 The Essential Milton Friedman
of reviews of the book, in phrases like “monumental consistency,” “monumental

coherence,” and “monumental ingenuity.”
The empirical findings and scrupulous data analysis in the Monetary
History came as an earthquake to the Keynesian belief structure that then domi-
nated the economics profession. Here are some of the highlights:
• Over the -year period ending in , there was remarkable
stability in the amount of real purchasing power (e.g. “ weeks’
income”) that people want to hold in the form of money. The demand
for real purchasing power does change over the course of that century,
but mostly gradually and predictably. For example, when permanent
incomes rise by  percent, the real purchasing power that people want
to hold tends to rise predictably by about . percent. By contrast,
when nonpermanent incomes rise, there is little change in the amount
of money people want to hold. This is consistent with a theory that
says that people hold money in order to buy things, and that (as we
saw in chapter one) they want to buy more things only when their
permanent incomes rise. This regularity in the data contrasts with the
Keynesian view that the demand for money is erratic and inherently
unpredictable.
• Because of that stability in demand, changes in the money supply do
in fact lead to changes in the price level as predicted by the quantity
theory. If you produce more money than people want, they’ll try to
get rid of the excess and prices will rise. The Keynesians had largely
denied this; Friedman and Schwartz demonstrated that the evidence
up to that time was on the side of the quantity theory.
• When new money is injected into the system, it takes a while for
prices to rise. Alice sells a paper clip to the government and thereby
acquires a newly printed $ bill, wants to get rid of it, tries to buy
things, and bids up prices—but the process takes time, sometimes
as long as two years. In the interim, especially if there happens to be
a recession in progress, Alice’s increased demand for goods encour-
ages businesses to produce more goods. (In the absence of a recession,
businesses are likely to be near their peak capacities to begin with,

The Essential Milton Friedman 
so instead of increased production, you tend to get an accelerated

increase in prices.)
• Therefore, an increase in the money supply typically leads to an
increase in economic activity (sometimes after a lag of many months),
followed by a rise in prices and a return to the old level of activity
(typically after a lag of many more months). Once again, this runs
counter to the old Keynesian belief that new money is often simply
held, and so has little effect on either prices or economic activity.
So you might think that in recessionary times, it would be a good idea
to create additional money and get the economy moving again. Unfortunately,
those long and variable lags make it essentially impossible to exploit this avenue:
By the time your monetary shock starts to bear fruit, the recession is likely to
be over, in which case all you’ve accomplished is a spurt of inflation.
From this, Friedman argued that changing the money supply is largely
ineffective (and even counter-productive) as a weapon against short-run prob-
lems like recessions, and therefore it’s best for policymakers to focus on the
long run. And in the long run, as we’ve seen in the preceding two chapters, the
quantity theory of money argues for a low and steady rate of money supply
growth. As many economists do, let’s call that the “Friedman rule.”
What happens when the Friedman rule is violated? We found out in the
s, during the disaster we remember as the Great Depression—with unem-
ployment rates ranging between  and  percent through much of the world,
incomes falling dramatically, and, in many places, entire industries (including
mining, logging, and construction) shutting down almost completely. Why?
Friedman and Schwartz laid the blame squarely at the feet of the monetary
authorities who allowed the US money supply to fall by almost one third. This,
they argued persuasively, turned a moderately severe recession into a tragedy.
Amazingly enough, nobody knew this before Friedman and Schwartz
came along. The Keynesians (this time including Keynes) believed that the
money supply had been largely stable throughout the s, and offered this
as evidence that a stable money supply is impotent against economic catastro-
phe. Money was being created, according to the Keynesians, and people were
simply holding it.

 The Essential Milton Friedman
That was simply false. What certainly happened was that the money
supply was allowed to shrink dramatically, largely due to bank failures that
the authorities did little to prevent or to counteract. (Remember that “money”
includes checking account balances, most of which are created by banks, as
when your banker gives you a $, loan by entering a few keystrokes in a
computer—or, in the s, a few pen strokes in a ledger—that creates a check-
ing account with a $, balance. When banks fail, those balances disappear.)
When money disappears, people try to acquire more of it (in the exact
reverse of what happens when new money is created and people try to get rid
of it). They do this by not buying things. In the long run, the only effect is a fall
in prices. But in the short run, the effect is a reduction in economic activity.
When that reduction in economic activity comes in the midst of an existing
recession, and when it leads to additional bank failures and further reductions
in the money supply, the disastrous short run can go on for many years.
So for economic policy, the key takeaway is that this history should not
be allowed to repeat itself. Academicians and policymakers have taken this
very much to heart.
Thanks largely to the policies that Friedman and Schwartz inspired,
North America entered a -year period of unprecedented economic stability,
with many believing that the frequent severe recessions of the past were never
to repeat themselves. In , Federal Reserve chairman Ben Bernanke, speak-
ing at Friedman’s th birthday celebration, addressed the great economist
directly and said:
Let me end my talk by abusing slightly my status as an official rep-

resentative of the Federal Reserve. I would like to say to Milton and
Anna: Regarding the Great Depression. You’re right, we did it. We’re
very sorry. But thanks to you, we won’t do it again.
Alas, that optimism faced a serious challenge in , when another

series of bank failures in a time of recession threatened to trigger a disaster
comparable to that of the s. In fact, the initial stages of the  recession
were every bit as severe and ominous as those of the Great Depression. But
true to Bernanke’s promise, the authorities took an active role to shore up the

The Essential Milton Friedman 
money supply. Although the ensuing recession was painful, it lasted only half
as long as the Depression, and (as measured by the fall in output from peak
to trough) was only one third as severe. Economists generally agree that the
lessons learned from the Monetary History played a critical role in preventing
the recurrence of a true s-style catastrophe.
There is, of course, a great deal of controversy about whether the Federal
Reserve governors did too little or too much in , and about whether they
did those things in the best possible way, or in one of the worst possible ways,
or somewhere in between. But they clearly understood that it was their mis-
sion not to repeat the mistakes of the Depression, and they were able to fulfill
that mission because Milton Friedman and Anna Schwartz had done the hard
work of discovering, documenting, and explaining to the world what those
mistakes had been.
A Postscript
The monetary environment has changed a lot since . For one thing, it’s
become a lot harder to decide what counts as “money.” In , it could take a
week to withdraw funds from your savings account. Today, you might make the
same withdrawal with a keystroke. Was your savings account a form of money
in ? Is it today? What about Bitcoins? Or home equity lines of credit? These
and other innovations have not only made it harder to define money in the first
place; they also appear—by offering so many alternatives to money—to have
made the demand for money less stable than it was in Friedman’s day.
The regulatory environment has also changed. In , it was illegal to
pay interest on checking accounts. Many states disallowed branch banking, so
that a given bank could have only one physical location, which you had to visit
in order to make a withdrawal. As regulations have eased, people have found
new ways to use money, contributing to additional fluctuations in demand.
As a result, the long-run and short-run relationships between money,
prices, and economic activity are not as they were in . Most strikingly, the
money supply has risen dramatically since the  crisis, but prices have not
responded as the old quantity theory would predict.
 This accords with Keynes’s prediction that the quantity theory is particularly likely to fail at a
time (such as the years following ) when interest rates are very low.

 The Essential Milton Friedman
Thus, while many of Friedman’s goals are well enshrined, many of his
preferred methods have been superceded. For example, Friedman’s goal of slow,
steady, and predictable inflation has been widely accepted by monetary authori-
ties around the world. But Friedman’s method—slow, steady, and predictable
growth in the money supply—has not. That method made sense in Friedman’s
day, when money demand appeared to be highly stable. It makes less sense in
the age of automated bill payments and cryptocurrencies, when the demand
for money has become more erratic and the supply of money has become more
difficult to control. Therefore today’s authorities tend to aim for low steady
inflation by controlling not the money supply, but short-term interest rates,
with the target interest rate continuously adjusted in response to observed
economic conditions. And, far more than Friedman ever envisioned, they
attempt to manipulate the demand for money.
The superficial reading is that by taking their eyes off the money sup-
ply, the authorities have rejected Friedman. The deeper reading is that by
doing whatever is necessary to control the growth of the price level—keeping
it gradual, steady, and predictable—they’ve been revealed as Friedmanites to
the core. They’ve digested the main message that at least by and large, money
matters profoundly for prices in the long run and for economic activity in the
short run. Nobody fully appreciated this before Friedman (some might have
suspected it, but the statistical analysis to support those suspicions was unavail-
able). Everybody gets it now, and that knowledge has saved us from more than
one catastrophe over the past several decades.
 Such policies are generally called Taylor Rules.

 Most importantly: Just as you have a checking account at your bank, your bank has a checking
account at the Federal Reserve. By adjusting the interest rate on that checking account, the Federal
Reserve can influence your banker’s demand for money.

Chapter 5
Unemployment
In , the economist William Phillips noticed a striking correlation: Times

of high inflation are times of low unemployment, and vice versa. Over the next
decade, the correlation held strong.
The lesson most economists drew was that policymakers face a trade-off :
You can have less unemployment, provided you’re willing to tolerate (and even
engineer) a bit more inflation.
Milton Friedman, almost a lone voice in the wilderness, begged to differ.
Not for the first time in his career, it fell to Friedman to remind the world that
correlation is not the same as causation.
In December , having just completed his term as president of the
American Economic Association, Milton Friedman gave a farewell address that
radically reshaped modern macroeconomics by reinterpreting the Phillips cor-
relation. He told, in essence, this story:
Suppose you’re a carpenter, currently unemployed because your best
job offer is $ a week, and you think you’d rather keep searching for some-
thing better. Of course if all prices and wages were to double, you’d be offered
$, a week, but you still wouldn’t take it, because the real value of your job
offer is unchanged.
But let’s tweak the story a little: Prices double overnight while you’re
asleep. In the morning, you’re awakened by a phone call from an employer
offering you $, a week. You’re delighted, because you’re not yet aware that
all prices have risen. You accept the job. After a few days, you visit the grocery
store, discover the cruel truth that this week’s $, goes no farther than last
week’s $, and submit your resignation.
www.fraserinstitute.org Fraser Institute 

 The Essential Milton Friedman
Obviously that story is highly stylized, but it’s not too hard to imagine
a realistic version in which prices are rising, workers are not fully aware of
the changes, and wage offers start to look better than they really are, fooling
some people into taking jobs they don’t really want, at least until they figure
out they’ve been fooled.
The same story works on the employer’s side: You’re a bicycle manu-
facturer, selling bicycles for $ each. If all prices and all wages double, you’ll
go on as before, selling them for $ each. Unless, of course, the doubling
happens while you sleep, and you are awakened the next morning by the news
that the price of bicycles has doubled, leading you to believe that the demand
for bicycles must have mushroomed, and in turn leading you to expand your
plant and hire more metalworkers, at least for a while. Eventually, of course,
you’ll realize that your plant expansion was ill-advised and you might not be
needing those extra workers very long.
If anything like this story is accurate, the morals are these:
• Expected changes in inflation have no effect on employment.
• An unexpected increase in inflation can cause a temporary increase in
employment—but not a permanent one.
• When there is a series of unexpected increases in inflation, econo-
mists (including economists named Phillips) might notice that these
increases are correlated with employment, but might fail to realize
that the correlation will survive only as long as the inflation continues
to be unexpected.
• A policymaker who nevertheless wants to use inflation to reduce
unemployment has to engineer an inflation that is higher than
expected. This is hard to accomplish for very long. If prices rise by 
percent in each of January, February, and March, people are going to
expect them to rise by  percent in April as well. So if I want to keep
unemployment down, I might need to engineer a  percent inflation
rate in April, and then  percent in May—leading people to expect a
 percent rate in June. Now I’ve got to unexpectedly go for  percent
in June, and this way lies madness.
• In that sense, using inflation to ease unemployment is a lot like using
narcotics to ease pain. The more you use today to make yourself feel

 The Essential Milton Friedman
good, the more you’ve got to use tomorrow just to stay on an even
keel.
• Even the temporary reductions in unemployment caused by unex-
pected inflation are not good things. I do you no favour if I reduce
unemployment by fooling you into taking a job you wouldn’t have
wanted without the deception.
Based on a story like this one, Friedman made his famous forecast that
any attempt to exploit the Phillips correlation by keeping inflation high for a
sustained period would surely fail—contrary to what pretty much everyone else
believed at the time. As the s unfolded, with inflation and unemployment
both on the rise, Friedman’s prediction proved to be spectacularly accurate
(see exhibit ). Before long, essentially all economists had come around to
Friedman’s view that expected inflation is powerless to fight unemployment.
One key lesson that economists and policymakers took to heart was
that it makes no sense to ask, for example, “What will happen to employment
if we increase the money supply this year by  percent?” The answer could be
anything at all, depending on what people expect. If prices rise by  percent
when people are expecting  percent, they tend to be surprised by how low
their wage offers are, and a lot of them turn down jobs as a result. If prices rise
by  percent when people are expecting  percent, you might get a boom in
employment.
Instead, the right conclusion is that a coherent monetary policy must
be a long-run policy—one that takes into account how each year’s changes
affects the following years’ expectations. Moreover, it’s highly desirable for the
authorities to manage expectations, by making clear commitments to policy
rules, and developing a reputation for transparency.
Friedman went on to hypothesize that there is a natural rate of unem-
ployment arising from the fact that we live in a changing and uncertain world,
where there will always be some people who prefer to be temporarily unem-
ployed in order to search for a better job or go back to school or deal with
family emergencies. Any attempt to use inflation to drive unemployment below
that natural rate is doomed to fail, at least in the long run, and is probably not
 One striking exception was Edmund Phelps, another Nobel-Prize-winner-to-be, who was simul-
taneously constructing a narrative very similar to Friedman’s.

The Essential Milton Friedman 
doing anyone any favours even during the brief interval in which it appears
to succeed. This natural rate hypothesis is now one of the central tenets of
macroeconomics.
The implications of the natural rate hypothesis go far beyond mon-
etary theory. In , the US Congress passed the Humphrey-Hawkins Full
Employment Bill, authorizing the government to create as many jobs as neces-
sary to keep the unemployment rate below  percent. The problem with this
is that in order to hire people, the government must pay them. In order to pay
them, it must either raise taxes or increase borrowing. Either way, there is less
income in private hands. Alice’s taxes rise, so she decides not to buy a swim-
ming pool. Bob lends to the government, so he has less to spend on restaurant
meals. Carl lends to the government instead of putting money in the bank,
which therefore rejects a loan application from Donna, who cancels her busi-
ness expansion. One way or another, private employment must fall.
Government hiring is not a recipe for increasing employment; it’s a
recipe for increasing government employment at the expense of reducing pri-
vate employment. Trying to legislate the natural rate of unemployment is like
trying to legislate the force of gravity. The laws of nature are oblivious to the
laws of men.
When Friedman said as much in a Newsweek column, Senator Hubert
Humphrey, the principal sponsor of the Humphrey-Hawkins legislation,
responded that Friedman had misunderstood him; the goal of this legislation
was not to substitute government employment for private employment, it was
to increase government employment without affecting private employment.
Humphrey had, in other words, missed the point entirely.
Why, then, do such laws get passed? Here is Friedman’s answer: “People
hired by government know who is their benefactor. People who lose their jobs
or fail to get them because of the government program do not know that that
is the source of their problem. The good effects are visible. The bad effects are
 The natural rate can change, and will if someone finds a better way to match workers to jobs or
if training programs become more effective. Friedman’s point is that you can’t change the natural
rate of unemployment by changing the money supply.
 In his writings and speeches, Friedman returned often to the theme that the effects of taxation
and the effects of government borrowing are pretty much interchangeable. Either way, resources
are transferred from the private sector to the public sector, and that’s most of what matters.

 The Essential Milton Friedman
invisible. The good effects generate votes. The bad effects generate discontent,
which is as likely to be directed at private business as at the government. The
great political challenge is to overcome this bias, which has been taking us
down the slippery slope to ever bigger government and to the destruction of
a free society.”
Although the ideas in Friedman’s presidential farewell address were new
and in many ways radical, they tended to reinforce many of the policy posi-
tions he’d been advocating all along. First, monetary policy should be focused
on the long run, because it can do very little good in the short run. (It can,
however, do great harm in the short run, as it did in the Great Depression,
and that of course should be avoided.) Second, there are also powerful limits
to what monetary policy can do in the long run—in the long run it can’t affect
employment, and for similar reasons, it can’t affect the production of goods and
services. Therefore monetary policy should be geared to the one thing it can
accomplish in the long run—a price level that grows gradually and predictably,
so that people can form accurate expectations and make appropriate plans.
This circle of ideas—both the underlying story about the Phillips correla-
tion and its implications for policy—has been immensely influential. Nowadays,
monetary authorities around the world see low and predictable inflation as a
primary goal, accept that monetary policy cannot affect output and employ-
ment in the long run, and see the management of expectations as a critical
part of their jobs.
There’s been a bit of evolution in how economists view unemployment.
Pretty much everyone now agrees—and this is largely Friedman’s doing—that
there is a natural rate of unemployment, and that it’s a fool’s errand to aim for
anything lower. But nowadays there’s a bit more concern with avoiding poli-
cies that might inadvertently push unemployment above its natural rate, and
this too has had some effect on monetary practice. But the broad themes of
monetary theory and monetary policy are instantly recognizable as those that
Milton Friedman laid out in , and as a world apart from everything that
came before.

Chapter 6
Chicago Price Theory
From his arrival at the University of Chicago in  until his retirement in
, Milton Friedman did more than anyone to set the intellectual agenda of
the Chicago economics department. Though Friedman was primarily known as
a monetary economist, the subject he chose to teach was price theory, or micro-
economics. Microeconomics was a required first-year graduate-level course and
it shaped the thinking of generations of students, giving them an extraordinarily
rich set of tools for analyzing problems in all areas of economics.
What exactly is microeconomics, and what was unique about the
Chicago variety? It might be best to answer that question with some examples.
In the s, Friedman’s counterpart at MIT was the enormously influential
future Nobelist Paul Samuelson, who also taught microeconomics. Here are a
few sample questions pulled almost at random from Samuelson’s final exams
and problem sets:
• Write a -minute essay explaining what Hicks does in Books I and II
of Value and Capital, relating the parts to each other.
• In  minutes, state the fundamental problems of bilateral monopoly,
duopoly and/or game theory. What solutions have been advanced?
Appraise them.
• In  minutes, discuss the principal theories relative to capital and
interest. Appraise.
At around the same time, Friedman at Chicago was posing exam ques-
tions like these:
www.fraserinstitute.org Fraser Institute 

 The Essential Milton Friedman
• Will a specific tax of, say, $ per cup of coffee raise the price of coffee
by more or less than an equivalent tax equal to a specified percent-
age of the price?
• True or false: Technological improvements in the production of
rayon, nylon, and other synthetic fabrics have tended to raise the
price of meat.
• If soybean farmers receive a subsidy of a fixed number of dollars per
acre, will the yield per acre rise or fall?
• It’s been alleged that the Kodak company’s highly profitable film
business allows it to undercut its competitors’ prices in the market
for cameras. Under what circumstances would it make sense for
Kodak to behave in this way?
Perhaps you’ve stopped to ponder one or more of Friedman’s questions.
I’m guessing that unless you’re a professional economist, you weren’t tempted
to ponder any of Samuelson’s. To Friedman, economics was always about the
sort of real-world problems that might be asked by a homemaker planning a
budget, a business owner formulating a pricing strategy, a policymaker for-
mulating a tax plan, or a citizen reading the news. Theories were interesting
when they made concrete predictions that could be tested. Should General
Motors instruct its subsidiaries to buy parts where they can get them the
cheapest, or to favour other GM subsidiaries? What would happen if every
licensed cab driver were issued a second license and permitted to sell it to
the highest bidder? If the Alcoa Corporation has a worldwide monopoly on
freshly mined aluminum, does it matter (for aluminum prices) whether they
have a monopoly on second-hand aluminum as well? What would happen
if the publishing industry were subject to the same sort of regulations faced
by television broadcasters?
It might appear that the answers to such questions could be anything
at all, depending on a great deal of information that isn’t given. But Friedman
 Here an equivalent tax is a tax designed to raise the same amount of revenue for the
government.
 This was in reference to a then-current antitrust case against the aluminum industry, where the
court had accepted the argument that it does not matter; the answer that Friedman was looking
for was that it might matter very much or not at all depending on a great many external factors,
which a successful student would at least partially list and analyze.

The Essential Milton Friedman 
taught the skill of arguing to a conclusion by focusing on the implications of

rational choice and incentive-driven behavior, making auxiliary assumptions
as necessary, and keeping careful track of how the conclusion might change if
those assumptions prove to be incorrect.
Over time, well-trained Chicago students graduated, got jobs, and dis-
seminated these skills to their own students, so that Chicago Price Theory
became a standard part of the curriculum in economics departments worldwide.
In Friedman’s hands, Chicago Price Theory was not only a power-
ful and innovative subject in its own right, but the key to all of economics.
Outside Chicago, subjects like macroeconomics and monetary theory were
often treated as quite separate from price theory. But in Friedman’s Chicago,
price theory was at the center of everything, including Friedman’s own work in
monetary theory. Indeed, one thing that strongly distinguishes Friedman from
his contemporaries is that his monetary theories depend crucially on a close
analysis of why people hold money in the first place—an analysis that in turn
depends crucially on the deft application of the tools of price theory.
Because Chicago Price Theory demands concrete answers to concrete
questions (as opposed to -minute ruminative essays), it invites a lot of argu-
ment. Being at Chicago meant constantly being drawn into arguments between
very smart people who defended opposing answers to some of those Friedman-
style exam questions. Those arguments (among the graduate students and
among the faculty) were huge learning experiences, where the participants
unraveled each other’s’ logic, and, more often than not, came away understand-
ing how different assumptions had led to different conclusions, and how those
assumptions might be put to the test.
This culture of argument was carefully cultivated by Friedman and
his colleague George Stigler, another future Nobelist who shares credit with
Friedman for the edifice of Chicago Price Theory. The remarkable thing
about those arguments is that, after hours or weeks or sometimes months
of back-and-forth, they tended to get settled, and from those settlements
came great ideas.
A legendary instance occurred in  when Professor Ronald Coase,
then teaching at the University of Virginia, visited Chicago to present a paper
on the theory of externalities—costs imposed on others without their consent.

 The Essential Milton Friedman
There’s an externality, for example, when I have to breathe your second-hand

smoke. As a result, you tend to smoke more than I’d like you to, and more than
would be justified by an impartial cost-benefit analysis. The solution, accord-
ing to all the textbooks in , was to tax the harmful activity—in this case
smoking—so that there would be less of it.
Professor Coase’s radical take on the matter was that just as your smok-
ing harms me, my complaining about it (and convincing my government to
tax it) harms you. So if the textbook logic were correct, we’d have to tax you
for smoking, tax me for making that tax necessary, tax you for making that
tax necessary, and thereby descend into madness. Professor Coase therefore
proposed an entirely novel analysis of the externality problem, the details of
which are fascinating but, alas, off-topic here.
Here is what I wrote about Coase’s visit to Chicago in my book The
Armchair Economist:
Coase’s seminar has become legendary among economists. It drew

the most brilliant and intellectually relentless audience imaginable.
George Stigler, one of the four future Nobel laureates in the room,
recalled the audience as a “simply superb” collection of theorists
and the occasion as one of the most exciting intellectual events of
his life. Before the talk, a vote was taken. There were  votes for
Arthur Pigou [the architect of the generally accepted theory] and
one for Ronald Coase. Stigler later commented that “If Ronald had
not been allowed to vote it would have been even more one-sided.”
Stigler’s recollection continues: “As usual, Milton did much of the

talking... My recollection is that Ronald didn’t persuade us. But he
 If your third cigarette brings you  cents worth of pleasure (net of what you paid for it) and
causes me  cents worth of distress, then an impartial cost-benefit analysis says it’s a good thing
for you to smoke that cigarette, because  is greater than . If your fourth cigarette brings you
an additional  cents worth of pleasure and causes me  cents worth of distress, then the same
impartial cost benefit analysis says it’s a bad thing.
 The key to that novel analysis is to recognize that your smoking imposes a cost on me, my
attempts to restrain your smoking impose a cost on you, and that a well-designed policy should
aim to minimize the total of all such costs.

The Essential Milton Friedman 
refused to yield to all our erroneous arguments. Milton would hit

him from one side, then from another. Then, to our horror, Milton
missed him and hit us. At the end of the evening the vote had
changed. There were  votes for Ronald and no votes for Pigou.”
Soon the entire profession had been won over, and eventually Coase
was awarded a well-deserved Nobel prize for ushering in a new era
in the economic analysis of law.
It should perhaps be added that Stigler’s reference to “the end of the

evening” is a bit of a euphemism. According to the recollections of some who
were there, the seminar began in mid-afternoon and wrapped up at around
 a.m., following a change of venue from the classroom to the living room of
Aaron Director (a Chicago law professor and Milton Friedman’s brother-in-
law). The Chicago style—the Friedman style—was to never close the door on
a subject until you’d nailed down every detail.
To that end, Friedman introduced a new kind of seminar: Each week in
his “money workshop,” an invited speaker would submit in advance a written
account of some research project he was currently working on. All participants
were expected to read this paper carefully in advance. When the seminar met,
the speaker was given a few minutes to introduce himself before the action got
under way. Then Friedman asked, “Are there any comments on page ?” If those
comments, and the disputes they generated, did not fill the allotted  minutes,
he would then ask, “Are there any comments on page ?” Speakers typically
left feeling simultaneously chastised and inspired, and revamped their research
agendas for the better, frequently including profuse thanks to Friedman and
his crew in the final versions of their papers.
Emboldened by the successes of Chicago Price Theory, its practitioners
soon sought to extend its scope by applying their methods to issues previously
thought to be beyond the scope of economics. Friedman’s brilliant disciple
Gary Becker encroached deeply into the field of sociology, using price theory
to analyze the causes and effects of racial discrimination, criminal behavior,
family sizes, power struggles in interpersonal relationships, and divorce rates.
Harry Markowitz and Eugene Fama used price theory to understand portfolio
investment decisions and thereby revolutionized the theory of finance. Robert

 The Essential Milton Friedman
Fogel employed price theory to illuminate the persistence of slavery in the

American south. Everybody mentioned in this paragraph was directly inspired
by Friedman, and every one of them was eventually awarded a Nobel Prize.
Friedman’s disciples also garnered another form of glory through the
illustrious contributions of their own students and their students’ students
and so on through the generations, with no end in sight. After many decades,
Chicago Price Theory—Milton Friedman’s Chicago Price Theory—remains one
of the most successful disciplines in intellectual history.

Chapter 7
Capitalism and Freedom
In , Milton Friedman burst forth from the academy into the public square
with Capitalism and Freedom, subsequently ranked number  on Time
Magazine’s list of the most influential books written in English in the years
–. More than half a century later, it remains in print in over a dozen
languages and ranks near the very top of Amazon’s list of bestsellers in eco-
nomic theory.
The book’s central thesis is that economic freedom is a prerequisite for
personal and political freedom. Here economic freedom refers to a system of free
markets and private ownership that operates with limited interference from
the government. Political and personal freedom encompasses free elections,
minority representation, freedom of expression, and the option to choose an
unorthodox lifestyle. If you want that kind of freedom, you must also have free
markets. Writing in , Friedman said he knew of no example, in any time or
in any place, of a society that had offered substantial political freedom without
also offering substantial economic freedom.
In the intervening half-century, no example has arisen. The Fraser
Institute compiles meticulous rankings of personal and economic freedom in
 countries, using  distinct indicators within each country; the methods
are spelled out in detail on the Institute’s website. Of the  countries that
rank highest in personal freedom, all but one are also in the top  percent for
economic freedom, and even the one exception (Iceland) is still comfortably
above the median.
 The seemingly arbitrary date range is because Time Magazine was founded in  and the list
was compiled in .
www.fraserinstitute.org Fraser Institute 

 The Essential Milton Friedman
Alas, this works in only one direction. Friedman observed, and the
Fraser Institute data confirm, that economic freedom is no guarantee of per-
sonal freedom. The United Arab Emirates is the th most economically free
country in the world, but ranks a bleak th out of  in personal freedom.
Seven other countries in the economically free top- fail to make the top 
percent for personal freedom.
Although such data are suggestive, Friedman was quick to point out that
they don’t actually prove anything about what might be possible in the future.
So the next step is to understand why and how political freedom is always and
everywhere undermined by socialism.
So take an example: A big part of both political and personal freedom is
the right to oppose your government’s policies. To do that effectively, you might
want to hold rallies, or film documentaries, or publish books, or advertise your
blog. For that, you need resources. Where will you get them?
In a capitalist society, you can turn to anyone who’s willing to fund you.
You can appeal to the grass roots, but that in turn might require some funds to
get you started. It might be more effective to approach a wealthy donor—and
if you’re turned away, you can approach another. You don’t even need a wealthy
donor who believes in your cause; you only need one who believes there’s
money to be made by selling your books and videos or by promoting your
website. You might not succeed, but you’ve got a lot of options. And indeed,
capitalist societies, including the United States, have always been rife with
anti-capitalist propaganda financed by wealthy capitalists.
Of course, even after you’ve raised funds, you might have trouble book-
ing airtime on a broadcast or cable network, because the owners might be
hostile to your cause. But you have at least two recourses still available. One is
to approach a different network. Another is to offer a higher price.
Under socialism, you’ve got a much bigger problem. If the government
owns the meeting halls, the recording studios, and the Internet providers, or
if it heavily regulates their owners, then you’ve got to approach the govern-
ment—and if they turn you away, there’s no place else to turn.
 Following Friedman, I will use the words capitalism and socialism to mean the presence and
the absence of economic freedom. Socialism can include government ownership of productive
resources or government control over the decisions made by private owners.

The Essential Milton Friedman 
This is a problem even if your government is run by idealists who are

dedicated to the principle that everyone has a right to be heard. The prob-
lem with that principle is that it’s not clear what “everyone” means. Resources
are limited, the demand for those resources is effectively unlimited, and that
means someone has to get turned away. As long as one entity controls all the
resources, those who are turned away are left with no alternatives. Capitalism
doesn’t guarantee you an audience, but it does give you an unlimited number
of opportunities to try.
It remains the case that if there are  meeting halls and  groups that
want to hold a rally,  will succeed and  will fail. But under socialism, the
 who succeed have all succeeded by appealing to the same group of officials,
while under capitalism the  who succeed will do so by appealing to a highly
diverse group of donors and entrepreneurs—so a wider diversity of opinions
will be heard. And as a bonus, under capitalism, there’s a strong incentive for
someone to build a st meeting hall.
Lest you think this is all abstract theorizing, consider the case of Winston
Churchill, who spent most of the s trying desperately to convince the
British public to take a firm stand against Adolf Hitler and the remilitarization
of Germany. Although Churchill was a leading citizen, a current member of
parliament and a past cabinet minister, the radio and television networks—all
owned by the British government—ruled that his views were too far out of the
mainstream and refused to sell him airtime.
Had there been private broadcast networks, free to sell airtime as they
pleased, Churchill would surely have reached a far larger audience. Might he
have thereby changed public opinion and the course of history? Of course we
can’t know. But we do know that socialism denied him the freedom even to try.
The reason capitalist societies have a chance of achieving political free-
dom is that in capitalist societies, economic power is dispersed. There’s always
someone else to appeal to.
We’ve been talking about political speech, but the same lesson applies
more broadly. Do you want to seek an audience for your unorthodox views
on childrearing, or the ethical treatment of animals, or the reconciliation of
science with religion? Freedom of speech requires capitalism because speech
often requires either airtime or a recording studio or a meeting hall or a web

 The Essential Milton Friedman
presence. If I won’t provide those because I don’t like your views, you can shop
elsewhere (or perhaps make me an offer that tempts me to shelve my principles).
But if one entity controls all the networks, recording studios, meeting halls, and
hosting services, and if that organization disapproves of your message, you’re
out of luck.
Freedom of occupational choice also requires capitalism because an
occupation often requires an employer. If I won’t hire you because I don’t like
your lifestyle or your ethnicity, you can offer to work for someone else. But if
one entity controls all the hiring, and disapproves of your lifestyle or your eth-
nicity, you’re out of luck. The freedom to eat at a restaurant requires capitalism
because somebody has to serve you. If I won’t serve you, you can find someone
else who will. But if one entity controls all the restaurants, and if that entity
decides you won’t be served, then you won’t be served.
Lest you think this is all abstract theorizing, consider the history of the
American south in the hundred years following the Civil War, where the so-
called “Jim Crow” laws made it difficult and often impossible for black citizens
to find jobs, to be served in restaurants, to ride buses, and to start businesses.
Why were these regulations thought necessary? Because it was widely recog-
nized that in their absence, black customers and black workers who were turned
away at one location would find themselves welcomed at another. In order to
deny black Americans their personal and political freedoms, politicians needed
to constrain the operation of the free market.
Indeed, Friedman makes the point that capitalism is particularly hostile
territory for racial, religious and political discrimination precisely because it
disperses economic activity so widely that you usually know absolutely noth-
ing about the race, religion, or politics of the people you’re trading with. When
you buy a car in a capitalist country, you have no idea whether the wheels were
attached by a Republican, a communist, a pagan, a Hindu, a lesbian, a poly-
amorist, or a person with skin that’s lighter or darker than yours. That makes
it essentially impossible for customers to discriminate against any of those
groups. By contrast, if the car companies were all controlled by the govern-
ment, it would be much easier for a group of bigoted customers to lobby for
discriminatory hiring practices.

The Essential Milton Friedman 
Most economic activity requires coordinating the activity of vast num-

bers of people. New Yorkers have bread on their tables thanks to the coordinated
activity of farmers, bakers, truckers, the producers of fertilizers, pesticides, and
tractors, the mechanics who maintain the tractors and the delivery trucks, and
literally thousands of others. There are only two ways to organize that activ-
ity: Through the anonymous market place, where individuals respond to price
signals (so that an increase in the demand for bread leads ultimately to an
increase in demand for tractor maintenance, leading mechanics to voluntarily
work overtime), or through top-down direction—in other words, coercion. In
the latter case, we are all subject to the whims and the prejudices of the direc-
tors. That leaves the market as the only economic system conducive to freedom.
Beyond all this, there’s a separate avenue by which capitalism fosters
personal freedom: It makes people richer, and the richer you are, the more free-
dom you can afford. Does your offbeat religion require you to make a pilgrimage
to San Francisco once a year? Do your idiosyncratic sexual tastes require you
to travel in search of a compatible mate? Does your love of nature compel you
to take four weeks off every summer and travel to exotic locales? Those things
are part of your personal freedom. They’re also expensive. In general, the richer
you are, the freer you are.
Of course it remains to be proven that the vast majority of people are
richer under capitalism than under socialism. To make that case in detail here
would take us far afield, but I hope it will suffice to note that virtually all econo-
mists agree on this, and that their agreement is based on a confluence of evi-
dence from a great many sources. One example: It’s easy to find towns on both
sides of the US/Mexico border that are nearly identical in climate, population,
and natural resources—but the towns on the US side are systematically much
richer for reasons that can easily be traced to policies that are more socialis-
tic south of the border and more capitalistic to the north. And of course the
Americans in those towns, having the resources to travel more widely, shop
more widely, and take longer vacations, are in several very important senses
freer than their Mexican counterparts. The past several decades have also pro-
vided some more dramatic examples, such as East versus West Germany and
North versus South Korea.

 The Essential Milton Friedman
This, then, is the main message of Capitalism and Freedom: Capitalism

is not guaranteed to make you free, but for multiple reasons, the absence of
capitalism is guaranteed to make you unfree. The next step is to translate this
generality into specific policy proposals, which is where Friedman turned next—
and so shall we.

Chapter 8
Policy Analysis
Having drawn the connection between free markets and free people, Friedman
moved on to specifics. The later chapters of Capitalism and Freedom make the
case for limiting the role of government in education, labour markets, corporate
governance, housing, old age insurance, the alleviation of poverty, and more.
Each of these chapters is short, engaging, and easily available, so you
don’t need me to repeat all their contents. Instead, I’ll try to convey their flavour
by summarizing just one chapter—on occupational licensing—with some of
the examples updated for the twenty-first century.
If you live in New York State and you want to be a barber, you’ll need to
sign up for  days of training and then pass an exam. (If that’s too onerous, you
might consider becoming an Emergency Medical Technician, which requires
only  training days.) That will qualify you to cut hair in a shop owned by
someone else. If you want to open your own shop, the licensing process is far
more complex, expensive, and burdensome.
Once you get your license, I hope you never find yourself wanting to move
to another state, where you’ll have to start all over again. People in state-licensed
occupations are  percent less likely to move across state boundaries than their
demographic counterparts in other occupations. To put that another way, for every
 non-licensed workers who move to another state for better weather, a spouse’s
job, or to be closer to their families, there are  licensed workers who move—
and another  who wanted to move but didn’t because of licensing issues.
 Occupational licensing was a lifelong interest of Friedman’s; it was the subject of his doctoral
dissertation.
 J. Johnson and M. Kleiner (), Is Occupational Licensing a Barrier to Interstate Migration?
NBER Working Paper number , National Bureau of Economic Research.
www.fraserinstitute.org Fraser Institute 

 The Essential Milton Friedman
The good news is that once you jump through those hoops and accept
those restrictions, you’re rewarded with a license that not only lets you cut hair;
it also artificially boosts your wages by virtue of its scarcity. Every time someone
balks at the licensing requirements, you’ve got one less competitor to worry
about. Recent studies find that licensing requirements tend to boost wages by
about  to  percent. This, of course, is good for barbers.
Who is it bad for? First, and most obviously, everyone who wants to
cut hair but is unwilling to pay thousands of dollars to sit in a classroom for 
days. Second, and a bit less obviously, everyone who ever pays for a haircut—in
other words, almost everyone.
How can a requirement that hurts almost everyone survive in a democ-
racy? Why do the voters stand for it? The answer is that the average voter
doesn’t care very much. An  percent premium for a haircut is an annoyance,
but probably not enough of an annoyance to change your vote. Barbers, though,
care very much about that  percent premium and they make sure that their
legislators are aware of that.
And so it goes in a great many other licensed occupations: welders, roof-
ers, ticket takers (seriously!), surveyors, salespeople, pharmacists, pipelayers,
all matter of medical personnel, engineers, massage therapists, manicurists,
lawyers, librarians, loan officers, morticians, bill collectors, boilermakers, cab
drivers, architects, and hundreds more. You might not much mind paying an
extra  percent for the occasional haircut, but if you’re paying, on average,
an extra  percent for all of those services, you can bet it adds up. Still, it’s
not worth your while to fight against any one of these license requirements,
whereas the welders, roofers, and ticket takers will all be doing what it takes
to maintain their own.
Defenders of licensing claim that it helps to insure quality: A trained
and licensed barber or welder is likely to perform better than a professor of
economics who decides on a whim to leave the classroom and start cutting
hair. But Friedman argues that this is, at best, an argument for certification,
not mandatory licensing. Barbers who complete  days of training can display
their certificates; barbers who are untrained will have no certificates to display,
and customers can decide for themselves who to patronize.

The Essential Milton Friedman 
A thinker less rigorous than Friedman might have gone on to make light
of the notion that you ever needed the government to protect you from a bad
haircut in the first place. But, characteristically, Friedman forgoes the easy path
and redirects our attention to what most people will consider the hardest case,
namely, medical licensing. Would we really be better off in a world where any
fool could practice medicine?
In such a world, there would be many more doctors, and some of them
would be much less good at their jobs than the doctors we have today. That’s
not obviously a bad thing. We don’t require every car to be as good as a Lexus,
and we don’t require every restaurant to earn three stars from Michelin, so
why should we need every doctor to attend four years of medical school fol-
lowed by an internship and a residency, while severely limiting the number of
medical schools and training hospitals? Friedman, with remarkable prescience,
envisioned possibilities that were largely unthinkable in , but have become
commonplace today, including group practices with multiple professionals of
different skill levels (we now call them nurse-practitioners and physicians’ assis-
tants) authorized to provide care at different levels. But even today, all of those
professionals are still licensed, and to become licensed, they must attend train-
ing academies that are themselves licensed. This not only restricts the number
of medical practices; it also limits experimentation with alternative organiza-
tional structures that might be as difficult for us to imagine as group practices
were before Friedman’s day. What if we abolished the licensing requirements
altogether? Would medicine be overrun by quacks?
Part of the answer is that people today routinely consult Consumer
Reports before buying a dishwasher and Angie’s List before hiring a roofer. In a
world with more medical options, there would be no lack of trusted reviewers.
But perhaps a better answer is that we’ve got some evidence on this. In
the US, the requirements for a dental license vary substantially from state to
state. By examining the dental health of incoming military recruits from all
over the country, economists have found that more stringent licensing require-
ments have no measurable effect on quality, though they do raise the price of
dental care.
M. Kleiner and R. Kudrle (), Does Regulation Affect Economic Outcomes? The Case of
Dentistry, Journal of Law and Economics .

 The Essential Milton Friedman
     
It is historically rare for an intellectual to have a direct and immediate effect on

even one matter of public policy, let alone several. Milton Friedman was surely
one of those rarities. As we’ve seen, he left a lasting influence on monetary
policy and in the minds of many is almost single-handedly responsible for the
fact that the mistakes of the Great Depression have never been repeated. In the
chapters to come, we’ll investigate his direct influence in several other areas,
including educational choice, exchange rate regimes, and the end of military
conscription in the United States.
More commonly, intellectuals wield their influence a bit more indirectly,
by expanding what political scientists call the Overton Window—the range of
policy ideas that the public is willing to take seriously. In this too, Friedman
was extraordinary. He appears to have been the first major public intellectual
to advocate for the then-radical notion that you don’t need six years of medical
training to lance a boil; that expansion of the Overton Window played a role
in making the idea of a physicians’ assistant at first thinkable and ultimately
commonplace. As we’ll see in the next chapter, occupational licensing is only
one of many issues where the Overton Window was breached by the strength
and persistence of Friedman’s arguments.
Despite those successes, the role of government in developed countries
has grown substantially since Friedman’s day. In the United States, a rough
measure is the size of the Federal Register, the annual publication that lists
all the new, revised, and proposed regulations imposed on businesses by the
US government. In , when Capitalism and Freedom appeared, the Federal
Register filled , pages. By , at , pages, it was over six times as long.
This suggests that the message of Capitalism and Freedom is as urgent
now as it has ever been. Fortunately, it’s still in print, still available in over
a dozen languages, and consistently near the top of the charts in Amazon’s
“Economic Theory”, “Free Enterprise” and “Political Ideologies” categories.
The celebrity he gained from Capitalism and Freedom launched not
just Friedman’s second career as a public intellectual (after his first career as
an academic) but a third and closely related career as an activist in the cause
of freedom. We’ll turn to that next.

Chapter 9
Activism
After the success of Capitalism and Freedom, Milton Friedman became the
world’s most widely recognized advocate for economic freedom. His op-ed col-
umns in Newsweek, appearing every three weeks for  years, reached a direct
audience of about three million subscribers and were widely quoted in other
media. Soon his face and his voice were familiar to many millions more, through
his frequent congressional testimony, public speeches, and media appearances.
Friedman wielded his celebrity and his rhetorical skills as power-
ful weapons not just in the battle of ideas, but also in the arena of practical
policymaking. Here were some of the causes with which he was most clearly
identified:
The volunteer military

Throughout the s, American society was torn apart by bitter controversy
over military conscription. The pro-conscription case rested largely on the
fallacious assertion that low-paid draftees are somehow less costly to society
than higher-paid volunteers. In reality, the social cost of converting Carl the
Carpenter into Sam the Soldier is equal to the forgone value of Carl’s carpentry
services, regardless of what Carl is paid. If Carl is conscripted, he bears much
of the cost himself; if he’s induced to volunteer via a market wage, the cost is
transferred to taxpayers. But the cost is the same either way.
So a conscripted army is exactly as costly as a hypothetical volunteer
army with exactly the same personnel. But a real volunteer army is always
cheaper because instead of having the same personnel it tends to attract recruits
with less valuable alternatives. If Carlos is a less productive carpenter than
Carl, then Carlos is more likely than Carl to volunteer. When Steve Jobs was
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 The Essential Milton Friedman
on the verge of inventing the modern personal computer in his garage, there
was never a threat that he might give it all up to join the army. By contrast, a
selective service board—with no way to distinguish Jobs from a host of far less
inspired and industrious tinkerers—could easily have made the monstrously
costly mistake of drafting him.
The draft, then, was as much an affront to economic common sense
as it was to personal freedom, and on both accounts it naturally attracted
Friedman’s attention. In , he participated in a now legendary conference
at the University of Chicago, organized by the anthropologist Sol Tax. By all
accounts, the shining star of that conference was Friedman’s former student
(and my own former colleague) Walter Oi, who estimated the full cost of con-
scription in brilliant detail. Before Oi’s presentation, a poll of the  attendees
found two-thirds in favour of the draft; afterwards, a follow-up poll found
two-thirds opposed.
Three years later, President Richard Nixon appointed Friedman to a
special commission to make recommendations regarding the future of the draft.
The  members were deliberately chosen to represent a diversity of views:
Friedman was one of five who vocally opposed the draft; another five vocally
supported it; and the remaining five were declared agnostics. After extensive
debates and meetings, Oi and Friedman won over every one of the draft’s sup-
porters and agnostics, and the commission delivered a unanimous report to the
president recommending that the draft be abolished. Shortly thereafter, it was.
Educational choice
Should there be public schools, and if so why? It’s not enough to argue that
schooling is valuable, because many things (including food and shelter) are
valuable, but most people don’t think those things should be provided by the
government. What makes schooling different? One possible answer: The food
you buy benefits your own family, whereas the education you buy benefits your
entire community because literacy and other basic skills are needed to main-
tain a stable democracy. Therefore, unless you’re extraordinarily community-
minded, if you had to provide for your children’s education yourself, you might
choose to under-educate them.

The Essential Milton Friedman 
But even that is at best an argument for public funding of education, not
an argument for public provision of education. Those are very different things,
and you can have one without the other. In a  essay, Milton Friedman
proposed exactly that: A system of educational vouchers, where governments
require a minimal level of schooling and provide parents with vouchers redeem-
able for that schooling at any certified institution of the parents’ choice. Those
who want to purchase education beyond the minimum would of course be free
to do so, at their own expense.
A voucher system would meet the goal of providing education for all in
a way that minimizes the role of government and maximizes the opportunity
for parental choice. It brings all the benefits of competition, with schools given
the incentive to attract students by maintaining quality. It means, too, that if
you’re very poor, you have a chance of sending your kids to a pretty good school
without having to uproot your family and find a way to move across town to
another school district.
The alternative is essentially a government monopoly. As Friedman
wrote, “You cannot make a monopolistic supplier of a service pay much atten-
tion to what its customers want, especially when it does not even get its funds
directly from its customers.” As a general rule, people are frugal when they
spend their own money, and they demand good value when they spend money
on themselves. But for the most part, school administrators are spending other
people’s money on other people’s children, which is a recipe for both profli-
gacy and carelessness. Between  and , US school spending increased
fivefold, but measures of quality declined.
Friedman’s essay on school choice was first written for an audience of
economists, but he included an updated version as a chapter in Capitalism and
Freedom, introducing the idea of vouchers to the public at large. (As Friedman
pointed out, the idea was not without precedent—it was partly inspired by the
GI Bill, whereby soldiers returning from World War II were presented with
educational vouchers as a reward for their service.) From there, the idea entered
the policy mainstream.
For the rest of their lives, Milton and Rose Friedman served as cru-
saders in the cause of educational choice, making their case in print and
in media appearances, lobbying decisionmakers, raising funds to support

 The Essential Milton Friedman
political initiatives and referenda, and creating the Milton and Rose Friedman
Foundation (now renamed edChoice) which carries on the Friedmans’ work,
along with sponsoring research and educating parents about the choices that
are now available.
Today educational vouchers are a reality in  of the  United States,
plus the District of Columbia. Another  states facilitate educational choice
through systems of educational savings accounts,  through tax-credit schol-
arship programs, and  through tax credits and deductions. Over  million
children in  states attend charter schools, which Friedman characterized as
a “step in the right direction,” though a limited one, as they are still part of the
government system. In almost every case, the political will to institute these
reforms can be traced back directly to the work of the Friedmans.
Regulation
Counterproductive regulation is a recurring theme in Capitalism and Freedom,
but one regulatory agency that goes unmentioned is the US Food and Drug
Administration, which, among other things, prohibits the sale of any new drug
that has not met the FDA’s standards for safety and efficacy.
Perhaps that was because even Milton Friedman, in , had no way
of knowing how much damage the FDA had wrought. In , Friedman’s
student Sam Peltzman filled that gap with a blockbuster paper comparing the
(considerable) number of lives the FDA had saved by keeping bad drugs off the
market with the even greater number of lives that had been lost because of good
drugs that the FDA had failed to make available. Friedman immediately took
notice and publicized Peltzman’s results in a widely quoted Newsweek column
calling for the abolition of the FDA.
In retrospect, said Friedman, Peltzman’s results are exactly what we
should have expected. As long as there is an FDA, it will occasionally make mis-
takes in both directions, approving some drugs that turn out to be harmful and
 The FDA’s regulatory powers were suddenly and dramatically increased in . Immediately
thereafter, there was a sharp, lasting, and unprecedented decrease in the rate at which new drugs
entered the marketplace. By , Peltzman had enough data—including data on differences
between new drug introductions in the US versus other countries—to argue that the decline had
in fact been caused by the FDA, and to estimate the number of lives lost as a consequence.

The Essential Milton Friedman 
rejecting or delaying others that might have saved lives. The first kind of mistake
makes headlines: “Mother of three dies after taking FDA-approved drug.”
The second kind of mistake is invisible; nobody ever sees a headline that
says: “Father of two dies of heart attack that could have been prevented if
FDA regulations had not made it prohibitively expensive to develop the
drug that would have saved him.”
Given that asymmetry, the FDA far prefers making the second kind of
mistake and therefore errs far too much in that direction. To those who contin-
ued to call for reform instead of abolition, Friedman followed up with another
column entitled “Barking Cats”:
What would you think of someone who said I would like to have
a cat, provided that it barked? Yet your statement that you favor
an FDA provided it behaved as you believe desirable is precisely
equivalent... The way the FDA now behaves, and the adverse con-
sequences, are not an accident, not a result of an easily corrected
human mistake, but a consequence of its constitution in precisely
the same way that a meow is related to the constitution of a cat.
The FDA is still around, and still, according to many contemporary

researchers, causing a great deal of harm both by delaying the introduction of
some new drugs and deterring the development of others. But thanks largely to
Friedman’s insistence on keeping this issue in the public eye, it has—contrary
to Friedman’s most pessimistic expectations—been at least partially reined in.
Since , pharmaceutical firms have been allowed to fund drug investiga-
tions that substantially speed up the FDA approval process. Doctors routinely
prescribe FDA-approved drugs for nonFDA-approved purposes. The FDA has
accelerated approvals during public health crises, particularly at the height of
the AIDS epidemic.
Exchange rate policy

Prior to , much of the world operated on a system of fixed exchange rates.
A United States dollar could be bought (or sold) for  Japanese yen, or .
Swiss francs, or  Austrian schillings, or . grams of gold. Under a system

 The Essential Milton Friedman
of international agreements, monetary authorities around the world agreed to

maintain these exchange rates by adjusting their money supplies if necessary.
If, say, the yen appeared to be rising in value, then the Japanese authorities
increased the supply of yen to counteract the rise. If traders started offering
less than . grams of gold for a dollar, the US authorities reduced the supply
of dollars to restore their value. Beginning in , Milton Friedman was a
vocal critic of this system, arguing (among other things) that, like any attempt
to control prices, it was inimical to freedom, it burdened the monetary authori-
ties with obligations that prevented them from doing their jobs properly, and
it was in any event doomed to fail as domestic pressures frequently prevented
the authorities from fulfilling their nominal obligations. Those periodic failures
were a significant source of just the kind of uncertainty and instability that the
system was supposed to prevent.
For decades, Friedman was the intellectual leader of a (very) small band
of advocates for flexible exchange rates, and produced a series of memoranda
detailing exactly how such a system could be made to work. These memoranda
proved invaluable in  when the United States announced that it would, for
the first time, allow the US dollar to float freely with respect to gold, and the
entire system of international agreements came tumbling down overnight. A
new system of flexible rates was smoothly ushered into place, largely following
the guidelines that Friedman had developed. Had those guidelines not been
available, the world might have moved in the opposite direction, toward more
extensive and unwieldy capital and exchange controls, likely necessitating new
and oppressive restrictions on international trade.
Friedman later wrote that this lesson illustrates the way economists
exert influence: “I have long believed that we do not influence the course of
events by persuading people that we are right when we make what they regard
as radical proposals. Rather, we exert influence by keeping options available
when something has to be done at a time of crisis.”
That seems right. The crisis of the Vietnam War brought the issue of
the military draft to a head; the crisis in America’s public schools inspired an
urgent search for alternatives; the crisis of the AIDS epidemic inspired the
FDA, for the first time, to liberalize its drug approval process. In each case, the
transition to a new policy required a lot of intellectual groundwork, laid down

The Essential Milton Friedman 
over many years, both as a detailed guide for policymakers and to win support
from the general public.
Laying that kind of groundwork was the role Friedman was born for,
by virtue both of his intellectual heft—about which we’ve said much—and his
extraordinary skill as a communicator, about we will next say more.

 Fraser Institute www.fraserinstitute.org
Chapter 10
Civil Discourse
In , Milton and Rose Friedman collaborated with the visionary television
producer Bob Chitester to create a television series called Free to Choose. The
series aired originally on the Public Broadcasting System in the United States,
where, with about three million viewers per episode, it was one of the most
popular programs in PBS history. A companion volume with the same title,
written by the Friedmans, was near the top of the year’s bestseller lists.
A decade later, Free to Choose served as a major inspiration for the lead-
ers of several formerly communist countries that were reinventing themselves
after the collapse of the Soviet Union. Mart Laar, the first prime minister of
the newly independent Estonia, explicitly named Free to Choose as his primary
source for economic policy guidance. Following a series of reforms modeled
on the Friedmans’ recommendations, Estonia spent several years as the fastest-
growing economy in Europe. Today, according to the human freedom rankings
in the Cato Institute–Fraser Institute–Friedrich Naumann Institute Human
Freedom Index, Estonia is a freer country than the United States of America.
Each episode of Free to Choose begins with a brief documentary high-
lighting the successes of capitalism and/or the failures of socialism, followed by
an extended discussion between Milton Friedman and an ideologically diverse
panel of experts. As the series was being developed, Friedman embarked on
a lecture tour of colleges and universities, where he engaged at length with
audiences, answering their questions and addressing their comments. Many
of these lectures were filmed by the Free to Choose production crew and still
draw a steady audience on the Internet.
Readers of Capitalism and Freedom and readers of Newsweek were
already familiar with many of Friedman’s ideas and arguments. But Free to
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 The Essential Milton Friedman
Choose revealed another and equally remarkable facet of Milton Friedman. In

the battle of ideas, he managed always and everywhere to be, all at once, both
purely relentless and perfectly respectful. I know of no other public figure who
has ever been able to pull off this combination so deftly.
The videos—both the episodes of Free to Choose and the lecture tour
videos—reveal Friedman as a master communicator, skewering the substance
of ill-considered arguments without cheap shots and without resorting to per-
sonal disparagement. His famously infectious smile manages to convey satis-
faction at having set the record straight with no hint of gloating or personal
triumph. It seems clear that he likes the people he’s engaging with, even when
he deplores their errors.
As a good economist, Friedman surely recognized the benefits of spe-
cialization. Most carpenters are not good economists for the same reason that
most economists are not good carpenters, and there’s nothing disreputable
about any of that. Many economists lose sight of this truism and let themselves
become exasperated by economic ignorance. Friedman, by contrast, always rev-
eled in human diversity. When a carpenter, a beautician, or a chemist spouted
economic nonsense, Friedman was quick to point out that “I’ve thought about
this stuff and you haven’t,” but scrupulously avoided the implication that he
was castigating them. When he debated with leaders of the radical Students
for a Democratic Society, Friedman always stressed that he and they sought
the same things—individual freedom, pluralism, and prosperity for the masses.
“The only difference between us,” he said with a smile, “is that I know how to
achieve those things and you don’t.”
With professional colleagues and others who could be expected to have
thought things through, Friedman was famously sharp-tongued, but he saved
his sardonic wit for targets his own size. Friedman’s lifelong friend Charles
Brunie recalls a cocktail party where a young man asked him a question in an
exceedingly rude manner again and again. Milton’s response was very gracious.
The next morning Milton was debating James Tobin, another Nobel laureate.
Tobin asked almost exactly the same question as had the young man the prior
evening, but he did it very politely. Milton went at him hammer and tongs. Later,
Brunie asked Milton why he was so polite to the young man and so aggressive
with Tobin. Friedman replied, “The young chap didn’t know what he was talking

The Essential Milton Friedman 
about. Conversely, James did—it was an ambush question, and I wasn’t going
to let him get away with it.”
The same sharp tongue was in evidence during Congressional testimony
about the military draft. Friedman was called to testify along with General
William Westmoreland, the top commander of US forces in the Vietnam War.
Westmoreland, an opponent of the volunteer army, said that he preferred not
to command an army of mercenaries. Friedman immediately responded by
asking Westmoreland whether he preferred to command an army of slaves.
He went on to observe that if volunteer soldiers are mercenaries, then so is
everyone else who is paid to do a job, including Westmoreland, Friedman, and
every physician, lawyer and butcher in the country.
For some, no degree of civility or fairness could compensate for
Friedman’s infuriating refusal to accept their poorly supported prejudices. The
storyteller Leo Rosten, in his book on People I Have Loved, Known or Admired,
changed Friedman’s name to Fenwick but otherwise painted a portrait that was
instantly recognizable to all who knew him:
He is an exceedingly lovable little man. His disposition is so sunny,

his character so open, that even the Most Hardened Cynics, of
whom my wife is International Chairman, call Fenwick “utterly
adorable.”
Yet, says Rosten, many people can’t stand him:
Fenwick is a man who goes around being logical. He even uses rea-
son at cocktail parties... The basic problem is that Fenwick, who is
very intelligent, assumes that other people are very intelligent too.
And that, believe it or not, is the way he talks to them. This makes
people uneasy, for nothing is more unsettling than to be treated as
if you are extremely intelligent—especially by someone you hardly
know. To avoid disillusioning such a man requires that you main-
tain a constant state of alert, and think before you speak... It even
makes you examine the partly packaged platitudes you have always
employed instead of thinking.

 The Essential Milton Friedman
In ordinary conversation, Fenwick is a fellow-traveler. He follows

every chug in your train of thought—indeed, he leaps right on the
train with you. And you have barely begun to pick up steam before
Fenwick excitedly demonstrates that (a) you have taken the wrong
train; or (b) it doesn’t stop where you want to go; or (c) the tracks
don’t lead from your premise to your expectations; or (d) you had
better jump off while the jumping’s good or you’ll land in the swamp
of mushy ideas you never suspected your position rests upon.
Oscar Wilde … once quipped: “I can stand brute force, but brute
reason is quite unbearable... It is hitting below the intellect.” Fenwick,
a beamish fellow, never hits below the intellect. He is always kind,
fair, patient, moderate—which greatly increases his unpopularity.
Do you follow me? Fenwick is so fair in discussions that people can’t
even accuse him of using unfair tactics, than which nothing is more
aggravating when you are wrong.
It is a truth universally acknowledged among those who knew Milton

Friedman personally that Rosten’s portrait of the kind, fair, patient, moderate,
and infuriatingly logical Fenwick is close to a perfect likeness. The mainte-
nance of that fair and even disposition even in the face of extreme hostility
is an accomplishment as rare and as praiseworthy as the permanent income
hypothesis or the quantity theory of money.
It is a testament to his personality that Friedman was beloved by almost
all who knew him. I spoke with him at length on a total of four or five occasions.
Each time he was gracious and kind beyond measure, even when we sharply
disagreed. We once clashed over the Drug War, to which we were both opposed
for the same reasons, though we differed over which reasons were most impor-
tant. He believed the biggest issue was the cost of enforcement, including the
cost of incarceration, not just to the taxpayers but to the families of those who
were incarcerated. I agreed this was big, but thought it still might be small
compared to the costs imposed on recreational drug users who overpaid for
the product and in many cases were deterred from using it entirely. Rather
than argue, we pulled out a scrap of paper and made some quick estimates.

The Essential Milton Friedman 
Our calculations showed that to some reasonable approximation, the costs of

enforcement and the costs to consumers were equal. As soon as we realized
this, Friedman laughed in evident delight. I’m still not sure exactly what he
found so delightful, but I think it had a lot to do with the sheer joy of being
reminded once again that disagreements are best settled with logic, evidence,
and an honest respect for the truth.
Friedman’s extraordinary warmth and kindness manifested itself too in
the strength of his marriage, which was much remarked upon. When Milton
and Rose were in a room together, the love between them was tangible. You
saw it when they were near each other, and you felt it even when they were on
opposite sides of the room, communicating in ways too subtle to describe and
too powerful to miss. This was evident even to strangers, who, remarkably often,
inquired afterward whether anyone else had noticed this exceptional bond. Yes,
they had. I’m honored and thankful to have known Milton Friedman, and to
live in a world that was much improved by his presence.

 Fraser Institute www.fraserinstitute.org
Notes on the chapters including
further readings
The Hoover Institution at Stanford University maintains a website titled The

Collected Works of Milton Friedman <https://miltonfriedman.hoover.org/col-
lections>. Most of the works by Friedman cited below can be found on that
website.
Chapter 1
Academic tradition dictates that pathbreaking ideas are presented first in jour-
nal articles and only later in books. Friedman broke with this tradition when he
introduced his permanent income hypothesis (along with  pages of support-
ing theory and evidence) in a book. That book, A Theory of the Consumption
Function, was published by Princeton University Press in .
Chapters 2 and 3
Robert Solow’s remark contrasting Milton Friedman’s obsessions with his own
appears in his contribution to a book of essays called Guidelines, Informal
Controls, and the Marketplace, edited by George Shultz and Robert Aliber, and
published by the University of Chicago Press in .
Friedman’s analysis of the demand and supply for money, together with
the conclusion that “inflation is always and everywhere a monetary phenom-
enon” and the implications for monetary policy, is spread out over many of
Friedman’s articles and essays, many of which are collected in a volume called
The Optimum Quantity of Money and Other Essays, published in  by Aldine.
Many of these essays are fairly technical, but Friedman provided a good and
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 The Essential Milton Friedman
largely non-technical overview in a -page essay titled The Counter-Revolution

in Monetary Theory, published in  by the Institute for Economic Affairs.
Chapter 4
Milton Friedman and Anna Schwartz’s blockbuster Monetary History of the
United States: - was published in  by the Princeton University
Press. For readers particularly interested in the onset of the catastrophe of the
s, the relevant chapter is Chapter , “The Great Contraction: -.”
This chapter was republished two years later as a stand-alone paperback from
the same publisher.
Chapter 5
William Phillips first drew his curves relating inflation and unemployment rates
in a paper entitled “The Relation Between Unemployment and the Rate of
Change of Money Wage Rates in the United Kingdom, -,” published
in Economica in November .
Friedman presented his radical reinterpretation of the data in his 
presidential address to the American Economic Association.
The future Nobelist Edmund Phelps proposed a similar analysis in
an Economica article entitled “Phillips Curves, Expectations of Inflation and
Optimal Unemployment over Time,” also in . Friedman’s presidential
address was published as an article titled “The Role of Monetary Policy” in the
Journal of Political Economy the following year. Friedman returned to the same
themes in another big public lecture, his  Nobel Prize acceptance speech,
titled “Inflation and Unemployment.”
Chapter 6
The lecture notes from Friedman’s price theory course were published as the
book Price Theory, published first in  by Taylor and Francis and then again
in  by Routledge. Other classic textbooks in the Chicago Price Theory
tradition include Theory of Price by George Stigler and Economic Theory by
Gary Becker.
Ronald Coase’s theory of externalities was published as “The Problem
of Social Cost,” in the Journal of Law and Economics, .

The Essential Milton Friedman 
Additional works of central importance in the Chicago Price Theory

tradition include:
• Gary Becker, The Economic Approach to Human Behavior, University
of Chicago Press, .
• Gary Becker, The Economics of Discrimination, University of Chicago
Press, .
• Gary Becker, A Treatise on the Family, Harvard University Press,
enlarged edition .
• Harry Markowitz, Portfolio Selection, Yale University Press, .
• Eugene Fama, Foundations of Finance, Basic Books, .
• Robert Fogel and Stanley Engerman, Time on the Cross: The
Economics of American Negro Slavery, Little Brown, .
Chapter 7
Capitalism and Freedom was published by the University of Chicago Press in
, then reissued in  and  with additional material.
The Human Freedom Index, a joint publication of the Fraser Institute,
the Cato Institute, and the Friedrich Naumann Foundation for Freedom is
available on the web at: <https://www.fraserinstitute.org/sites/default/files/
human-freedom-index-.pdf>.
Chapter 8
As mentioned in the text, Friedman’s interest in occupational licensing grew
out of his doctoral research. This research was eventually published by the
National Bureau for Economic Research (NBER for short)—but not immedi-
ately, due to concerns about Friedman’s incendiary conclusion that medical
licensure was devised primarily as a barrier to entry in order to help maintain
higher incomes for doctors.
The dissertation itself was about  pages long, and is still widely
viewed as a tour de force. It formed the foundation for two of the major themes
in modern labour economics. First, Friedman (along with his dissertation advi-
sor, the Nobel laureate Simon Kuznets) was the first to carefully compute the
returns to human capital investments (that is, the acquisition of skills), fore-
shadowing the revolution in human capital theory that drove much of the

 The Essential Milton Friedman
pioneering work in labour economics for the next two decades. Second, they
pioneered the theory of compensating wage differentials (that is, the wage
premiums people earn for doing relatively undesirable work). This, too, mush-
roomed into a major theme in modern labour economics.
The NBER book, listing Friedman and Kuznets as authors, was pub-
lished in  under the title Income from Independent Professions.
Chapter 9
Friedman’s Newsweek columns were collected in a number of hard cover vol-
umes, but are all available on line at the Hoover Institution’s website: <https://
miltonfriedman.hoover.org/collections>.
Regarding the volunteer military: The participants in the  Sol Tax
conference at Chicago produced a volume entitled The Draft: A Handbook
of Facts and Alternatives which was published that year by the University of
Chicago Press. This volume contains the text of Walter Oi’s historic presenta-
tion, under the title “The Costs and Implications of an All-Volunteer Force.” Oi
expanded on this material in “The Economic Cost of the Draft” in the American
Economic Review (). Friedman followed up with the brief essay “Why Not
a Voluntary Army?” in the New Individualist Review in .
Regarding educational choice: Friedman’s  essay proposing vouch-
ers, “The Role of Government in Education,” is included in Economics and the
Public Interest, edited by Robert Solo and published by the Rutgers University
Press.
Regarding regulation: The Sam Peltzman article on the FDA, “An
Evaluation of Consumer Protection Legislation: The  Drug Amendments,”
was published in  in the Journal of Political Economy.
Regarding exchange rates: Friedman first broached the issue in an
essay entitled “The Case for Flexible Exchange Rates,” written and circulated
in  but published in  as a chapter in Friedman’s book Essays in Positive
Economics from the University of Chicago Press.

The Essential Milton Friedman 
Chapter 10
Free to Choose by Milton and Rose Friedman was published by Houghton
Mifflin in . Leo Rosten’s People I Have Loved, Known or Admired was
published by McGraw-Hill in .

 The Essential Milton Friedman

The Essential Milton Friedman 
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Citation Landsburg, Steven E. (). The Essential Milton Friedman. Fraser Insti-
tute.
Cover design and artwork Bill C. Ray

 The Essential Milton Friedman
About the author

Steven E. Landsburg is a professor of economics at the University of Rochester. He is
the author of Can You Outsmart an Economist?, The Big Questions, More Sex is Safer
Sex, Fair Play, The Armchair Economist, two textbooks on economics, and over 
journal articles in mathematics, economics and philosophy. He has written regularly
for Forbes and Slate and occasionally for The Wall Street Journal, The New York Times,
and other publications.
Publisher’s acknowledgments
The Fraser Institute would like to express its gratitude to the Lotte and John Hecht
Memorial Foundation for its support for Essential Hayek () and Essential Adam
Smith (), which established the foundation for the extended Essential Scholars
series. We would also like to thank the John Templeton Foundation, along with the
Lotte and John Hecht Memorial Foundation, for their support of this specific volume,
Essential Milton Friedman, the third book in the Essential Scholars series.

The Essential Milton Friedman 
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 The Essential Milton Friedman
About the Fraser Institute

Our vision is a free and prosperous world where individuals benefit from greater choice,
competitive markets, and personal responsibility. Our mission is to measure, study, and
communicate the impact of competitive markets and government interventions on the
welfare of individuals.
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Nous envisageons un monde libre et prospère, où chaque personne bénéficie d’un plus
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reviewers should arise during the Institute’s peer review process, the Institute has an
Editorial Advisory Board, a panel of scholars from Canada, the United States, and
Europe to whom it can turn for help in resolving the dispute.

The Essential Milton Friedman 
Editorial Advisory Board

Members
Prof. Terry L. Anderson Prof. Herbert G. Grubel
Prof. Robert Barro Prof. James Gwartney
Prof. Jean-Pierre Centi Prof. Ronald W. Jones
Prof. John Chant Dr. Jerry Jordan
Prof. Bev Dahlby Prof. Ross McKitrick
Prof. Erwin Diewert Prof. Michael Parkin
Prof. Stephen Easton Prof. Friedrich Schneider
Prof. J.C. Herbert Emery Prof. Lawrence B. Smith
Prof. Jack L. Granatstein Dr. Vito Tanzi
Past members
Prof. Armen Alchian* Prof. F.G. Pennance*
Prof. Michael Bliss Prof. George Stigler* †
Prof. James M. Buchanan* † Sir Alan Walters*
Prof. Friedrich A. Hayek* † Prof. Edwin G. West*
Prof. H.G. Johnson*
* deceased; † Nobel Laureate

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The Essential MILTON

Milton Friedman was one of the most influential economists

The Essential MILTON FRIEDMAN

But Friedman’s influence extended beyond economists. To the public

This book briefly summarizes Friedman’s

economic practice, economic policy, and

Printed and bound in Canada

Cover design and artwork

1. The Permanent Income Hypothesis / 3

2. Money, Prices, and Inflation / 9

6. Chicago Price Theory / 29

7. Capitalism and Freedom / 36

10. Civil Discourse / 53

Notes on the chapters including further readings / 59

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The Permanent Income

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The permanent income hypothesis also settles a nagging riddle that

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In fact, essentially all economists now view the permanent income

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Money, Prices, and Inflation

The Nobel Prize-winning economist Robert Solow once observed that

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work to an emergency plumbing repair. If my gutter guy starts taking credit

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What causes inﬂation? Our moral generalizes: Inﬂation is always caused

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of reviews of the book, in phrases like “monumental consistency,” “monumental

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so instead of increased production, you tend to get an accelerated

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Let me end my talk by abusing slightly my status as an oﬃcial rep-

Alas, that optimism faced a serious challenge in , when another

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 Such policies are generally called Taylor Rules.

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In , the economist William Phillips noticed a striking correlation: Times

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Chicago Price Theory

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taught the skill of arguing to a conclusion by focusing on the implications of